Cigarette Prices Surge

This was pretty much in line with expectations for a 0.4% month-over-month and 1.1% year-over-year rise.

Meanwhile, core PPI (ex food and energy) was up 0.3% on the month and 1.4% on the year.

This was ahead of expectations for a 0.1% MoM and a 1.3% YoY rise in November.

Nearly half of the December increase in finished core goods can be attributed to the 3.6% increase in prices for tobacco products. This was the biggest one-month spike in six years.

"Manufacturers tend to impose one big price increase per year, in Dec, so this is not the start of a sustained trend," Ian Shepherdson of Pantheon Macroeconomics said in a note. "With core materials price down 5.9% y/y we see no threat to core finished goods prices for the foreseeable future. To the extent we worry about inflation, the risk is in services - rent - not goods."

Ahead of the data release, Morgan Stanley's Ted Wieseman wrotes, "[T]obacco prices are not seasonally adjusted in the PPI report even though there's been a regular pattern of December cigarette price hikes in recent years. That will probably again provide a boost to the core PPI this December, but excluding tobacco we look for the core to remain near 0.1%."